Property is one of the very few asset classes that gives you the opportunity to leverage against the asset. “Leverage” in the property world means taking a “mortgage” and in most secure global markets, banks are willing to lend to foreign investors at levels between 50-70 per cent of the property purchase price. If you’re a “buy-to-let” investor then really you shouldn’t be looking to leverage in excess than this level as in most cases. It’s important that the rental money you generate from the property, covers your ongoing mortgage costs so month on month you are running with a neutral or positive cashflow.
In Dubai, reports show that still over 70 per cent of the properties are purchased on a cash basis. In the UK and the US, very few investors purchase buy-to-let properties without the use of a mortgage and there are many benefits to this. If someone has a million dollars (Dh3.67 million), rather than purchasing in full cash, it makes financial sense to spread the risk on the investment and look to build a diversified property portfolio, using local bank financing at around 60 per cent on each property.
One million dollars in cash would allow you to purchase a property for $500,000 ($300,000 mortgage finance) in London, a New York apartment worth $1 million ($600,000 mortgage finance) as well as an apartment in Kuala Lumpur at $500,000 ($300,000 mortgage finance), for example. This would equate to a cash investment (net of fees) of $1 million and would secure $2 million worth of exposure across three of the strongest property markets globally.
In any investment you never go in with the outlook of that asset losing money. If you did this you would obviously never invest in the first place. You should however always be realistic and be open to the worst-case scenario. In prime global property markets, the downside is minimal and the upside consistent.
This is a big part to building a sustainable property investment portfolio. I always advise to diversify property investment portfolio’s so that if one market drops and loses value, you have others which may be doing better.
A strong property market usually has relatively favourable lending rates which are sustained. The banking system and clarity of a market needs to be one which is established, based on a strong legal system and has a track record of offering favourable lending rates and conditions.
Some growth markets is South America and Asia look to have favourable property assets but often don’t offer mortgages to foreign investors or if they do, the rates are significant.
For example, Brazilian banks lend money against properties, however you should be prepared to pay double-digit interest rates for that benefit. London, New York and Australia offer very favourable lending rates of around 4 per cent per annum. These markets also have a decent track record when it comes to steady interest and lending rates from banks.
You should always look to invest into markets where there is a strong tenant demand from professionals. If your property is not tenanted then it’s not income generating and will not only cost you money paying your mortgage, you will have other running cost expenses, such as management fees.
If you borrow 60 per cent from banks and invest in the right locations, rental income should cover your mortgage and management costs. Location is key to ensuring your property is constantly tenanted, with professional tenants.
You may have the best property on the street but if it’s not tenanted, that same property will cost you money. The main idea of buy-to-let is to have someone else paying your mortgage for you, so that once your mortgage has been paid off or you have generated sufficient equity in the property through capital appreciation, you can remortgage it, pull out more equity to reinvest or for other investments.
— The writer is director and head of Middle East operations at IP Global.